Lecture #2 - Growing Population and Economic Growth
The Economic System
Starting with Physics
- First Law of Thermodynamics - "The change in the internal energy of a closed
thermodynamic system is equal to the sum of the amount of heat energy supplied
to or removed from the system and the work done on or by the system."
- Energy is neither created or destroyed
- Second Law of Thermodynamics - "The total entropy of any isolated
thermodynamic system always increases over time, approaching a maximum value."
- To do work, there has to be an energy difference.
- Entropy means energy differences equalize over time.
- Example - you place a hot cup of coffee on your desk.
The room's temperature and coffee's temperature equalizes. The room is
slightly, slightly warmer while the coffee is colder
- The energy is still there from the first law
- Economic activity like production, consumption, transportation, etc. all use
energy and resources from the environment.
- Everything comes from the environment
- Examine the graph:
- Humans extract resources and energy from the environment
- Humans use resources and energy to produce goods and services
- Then humans consume these products
- Each human activity generates wastes and energy that is returned to
- Human activities could do the following:
- Resource depletion - humans extract more resources than can be
- Humans extract water and supply it to cities
- Many cities are extracting more water than the amount being
replenished by rainfall
- Pollution - human activities that degrade the environment or resource
- Humans emit sulfur dioxide from burning of coal.
- The Sulfur dioxide turns into acid rain, which damages forests
- Acid rain depletes minerals from the soil and raises the ph
of water, killing the fish
- Environment does have a sink capacity
- Sink capacity - the environment can handle a level of pollution or
waste with minimal impact.
- Once the pollution or waste exceeds the sink capacity, then it
damages the environment.
- What factors drives this model?
- Population growth - more people consume goods and services
- Demands for resources and energy increases
- More wastes and waste energy is produced
- Economic growth - society produces more goods and services
- Each person consumes more goods and services
- More wastes and waste energy is produced
- Be careful
- Technology and institutional arrangement impact the amount of
resources, energy, and waste that humans produce
- Last 10 years, people in the United States recycle more
- Glass bottles, aluminum, paper, plastics, etc are recycled
- New institutions and arrangements had to be developed
- Bins and collection centers where people can dispose of their
- Recycling centers that separates the types of waste
- Industries adjusting their production processes to include
- New transportation vehicles for recycled wastes
- Traditionally, metals have always been recycled like copper
- Nobody throws away silver and gold
- Market prices exist for recycled materials
- Be careful!
- Recycled materials do not mean it is cheaper
- Costs money for recycling centers, sorting, machines, equipment,
- Some claim recycling makes products and services more
- You have to compare the cost of recycling the material to
extracting the material from the environment.
- High-income countries like United States and Europe are big
- More is said later in the Environmental Kuznet's Curve
- More people put more pressure on the environment
- Primary energy consumption increased globally
by 4.3% in 2004
- As much as 60% of the global population depends on the waters
of international fresh water systems
- Rivers and lakes of which basins are
shared by more than two countries
- Predicting fresh water shortages
- Could have more wars and conflicts over fresh water
Graph below shows how fast the world's population is growing
- The developed world is 75% urban
- The rate is accelerating in the
- By 2030 urban population is expected to rise to five billion
or 60% of the world’s population
- Sources - U.N. Population Division report World Urbanization Prospects: 2003
Revision; BP Statistical Review of World Energy June • 2005; GEO Year Book 2006;
- The prediction has a problem
- Population growth rate has been slowing and is shown below
- Why is population slowing?
- Children are expensive in both money and time
- Developed countries have close to a zero population growth rate
- People delay having children
- Complete an education
- Accumulate assets like a house, car, etc.
- Much of the population growth is in developing countries
- HIV is impacting population growth rates in some African
- Now we see why Mathusian ideas keep coming back
- Population growth is taken as, Pt = Poert
- P is population, r is growth rate, and t is time
- Net growth is birth rate – death rate
- Paul R. Ehrlich wrote The Population Bomb in 1968
- Disastrous predictions for resources and environmental degradation
- Running out of petroleum
- Killing off all the fish (over harvesting)
- Many species are going extinct
- Biologist use a logistic growth function for species
- It is an upside down "U-Shape"
- Example - yeasts
- Add yeasts to a juice, wort (i.e. before beer is beer), or
- The yeasts rapidly multiply, consuming the sugar
- Ethanol and carbon dioxide are waste products
- Eventually the yeast population reaches a peak and then
- As ethanol reaches about 12%, the yeast dies in their
- Many examples of this in biology
- Environment has a carrying capacity
- The level of population a natural resource base can sustain
without depletion, whether is be humans or animals
- Once the population passes the threshold of the carrying
capacity, then population declines.
- Population is depleting the resources
- More people consume more goods and services
- Demand function - relationship between a market price and quantity
demanded by the consumers
- Law of Demand - a higher market price means consumers reduce
their quantity demanded
- Supply function - relationship between a market price and quantity
supplied by the producers
- Law of Supply - a higher market price means producers want to
increase their quantity supplied
- A market brings these two behaviors together
- Market price and quantity are shown below:
- Market is stable
- If price is higher than market price of $2
- Market has a surplus
- Producers are supplying more than what consumers want
- Producers lower the price until the price is $2 again
- If price is lower than market price of $2,
- Market has a shortage
- Consumers want more than what producers are supplying
- Producers raise the price until it is $2
- Market has many assumptions
- Lectures 3 and 4 we will discuss market failures
- Why do some markets have a perpetually shortage or surplus?
- Government is intervening with the market price
- Why is demand and supply important?
- Higher population means more people, and thus, more consumers
- Demand shifts to the right
- Market price and quantity both increase
- Producers increase their quantity supplied
- Humans have market prices for their goods and services
- High market prices cause
- Industries expand to the higher demand and price
- More suppliers enter the market
- Supply shifts right
- Market price falls
- The price drop depends on industry and its long-run cost
- More products are supplied to market
- More resources are located and extracted
- More waste are generated
- Spurs technological progress
- If many industries are expanding within a country, then we have economic
- Gross Domestic Product (GDP) - the traditional measure of
- GDP is the sum of the money values of all final goods and
services produced in a country during a year.
- Does not include sales of intermediate goods and services
- Only includes products and services produced within a
- Does not include voluntary work
- Does not include degradation to the environment
- Does not include depletion of resources
- Depleting a stock of natural resources (e.g. oil, minerals, forests) increases
- Used in production of goods and services
- Future generations could be hurt
- Less petroleum or no forests if they are cut down
- Economic growth -increases in GDP
- Usually GDP per-capita output
- Per capita is per person
- A higher GDP per capita means each citizen has more goods and
- Thus, population is important.
- Picture below shows GDP percent-growth rate in 2007
- Before the 2008 Financial Crisis
- Derivation of a Growth Model
- Total production of goods and services in a country are treated as
one large production function for whole economy
- Common in growth theory
GDPt = f(A, Kt , Lt , Rt , Et)
- Variables are
- GDP at time t
- A is autonomous growth
- Reflects technology, usually the intercept in a
- K is capital
- L is labor
- E is for energy
- R is for natural resources
- Usually equation has E or R, but not both
- Petroleum or coal are resources that society derives energy from
- Is economic growth good or bad for the environment?
- More growth means GDP is increasing
- Requires more resources and energy
- Technology can change A too, creating an offset!
- If government imposes restrictions on natural resources or energy use,
then regulations put restrictions on natural resources, R, or energy, E.
- Companies could adjust capital, K, or labor, L, but restrictions
would most likely lower GDP growth
- Technological progress could increase A also
- It is difficult to measure impacts of regulations on resources,
environment, and GDP
- Government imposes a regulations to reduce air pollution in a city
- Causes higher costs
- People may be healthier
- Live longer, work harder, pay less money for medical
- Thus, regulations slow GDP down initially, but healthier people make
GDP grow faster.
The Environmental Kuznet's Curve
- Kuznet's curve is a hypothesized relationship between environmental degradation
and income per capita.
- The shape of the relationship is an upside down U-shape.
- The shape is estimated as a quadratic, Et=f(GDP, GDP2), where E
is pollution emissions at time t per capita and GDP per capita.
- When income per capita is low, a country does not invest in pollution abatement.
- As income per capita increases, a country invests in more pollution abatement.
- Society goes through transitions from
agricultural to heavy industrial, which increase pollution.
- Over time, heavy
industrial is replaced with services and light industrial, which generates less
- Environmental regulations can strengthen over time as country
- Higher income allows more investment in pollution equipment.
- Country goes through deforestation and then afforestation.
- Some pollution levels increase at a decreasing rate.
- Carbon dioxide emissions
- Technology reduces a car engine's CO2 emissions
- Higher incomes means more people buy cars
- One possible reason for the problems of finding the Kuznet curve is the process
- As developed countries develop pollution abatement
technologies, developing countries can implement these technologies at a faster
rate, which give different estimates of the Kuznet curve.
- Latecomers had the advantage of learning from other nations' environmental
- They learn what works and does not work
- This is a technological leader-follower model.
Japan's History of Environmental Policy
- Early concerns about damage from copper mining arose in 1868
- Government did not pay serious attention to the environment until after World War II.
- United States helped re-develop their country
- National economic development was the central government’s top priority.
- Pollution was viewed as a local government problem.
- Rapid growth in the 1950s led to increases in pollution.
- Japan had disease outbreaks from water pollution
- The National Diet passed
two water quality laws in 1958
- The first laws at the national
- Before hosting the Tokyo Olympics in 1964
- International pressure to
improve water quality in the Sumida River in Tokyo.
- Japanese government created the Pollution Control Division of the Ministry of Health
and Welfare (1964) and the Basic Law for Environmental Pollution Control (1967).
- Recently, Japan has focus policy focus shifted to global issues.
- Kyoto Protocol - reduce greenhouse gas emission to slow down global
- Japan is now focusing on “quality of life” issues.
- Not mentioned
- Since the early 1990s, the Japanese economy entered into two decades
of sluggish growth
- Real estate prices are still dropping and economy has weak
History of Environmental Policy
- Mao Zedong declared in 1949 that pollution was a
capitalist problem that did not exist in socialist countries.
- In 1972, water pollution began to attract the government’s attention
- Environmental Protection Law passed in 1979.
- The Constitution stated that protecting the environment was the responsibility
of the state.
- Polluters should be held responsible for pollution
treatment, including a polluter pays fee system.
- Government has lack of resources
- Local governments focus on growth
- More factories, more jobs, more income, and more taxes
- Local governments opened illegal coal mines and built
electric power plants without the national government's approval
- The Olympics were held in China in 2008
- China was embarrassed about the green water off of Shanghai
- Some Olympiads wore gas mask in Beijing because of the high air pollution
- Maybe the Chinese government will add more environmental laws
The Developing World
- The developing world
- Have higher population growth rates
- Moving from agrarian societies to industrialized
societies, which results in more pollution.
- Increasing urbanization
- People are moving to the cites, because that is where the jobs
- Same thing in the United States and Kazakhstan
- Potential Problems
- Urbanization - environmental problems become problems when people are close together, so that
their actions affect others nearby.
- The infrastructure to support increased populations is lacking in many cities.
- Fresh water, collecting and treating waste water, solid
waste disposal, etc.
- Weak governance
- Not only are regulations often weaker, but the government may
not enforcement compliance.
- Corruption and lack of democracy are also problems.
- Lack of information/education
- Educated people (in the United States) are pro-environment
- Encourage environmental regulations
- Developing countries have wide spread poverty
- Leaders emphasize economic growth
- Place less weight on future
considerations like environmental damage or resource depletion
- Developing countries may use less efficient technologies
- They could buy the old equipment and machines used in
- Less efficient machines use more energy and resources
Leakages - not in many introductory courses
- If they become high-income societies, then they may invest in green
technologies or replenish renewable resources
- Population growth rate slows down
- However, high-income societies use more resources and produce more
pollution such as carbon dioxide.
- United States - environmental laws became too harsh
- Compliance costs were too high
- Some industries relocated to countries like Mexico and China
- Weak environmental laws
- Cheaper labor
- These industries pollute even more shipping their products to
the United States
- High U.S. incomes are indirectly creating large amounts of
- I think this happened to Japan too
- Japan started to outsource the production of goods and services
to other Asian countries.
- Japan was big investors in other countries like China, South
- Some countries activity seek out companies, trying to get them to
invest in their economies
- Creates jobs, incomes, economic growth, and more tax revenue